Facebook’s Unique Ownership Structure Might Be its Downfall
Facebook is relatively unique for a public company in that its CEO Mark Zukerberg does not serve at the pleasure of the stockholders. This structure may sound brilliant, but it means that the CEO effectively owns the company and the stockholders are just along for the ride. While Zukerberg is surrounded by experienced executives, he is unmanaged; yet he believes he has similar protections as other CEOs, who are more conventionally overseen by their boards.
CEOs with too much power have been problematic in the past because, as the old saying goes, power tends to corrupt, and absolute power corrupts absolutely. Zuckerberg’s power has led him to take risks that a more conventional CEO would avoid for fear of being fired.
This problem is playing out in Congress this week as former Facebook Product Manager Frances Haugen testifies that Facebook intentionally harms users and profits from that harm. Zuckerberg’s response was to attack the whistleblower, but that typically doesn’t play well. This may set up a series of events that could cause Facebook to fail.
Let’s talk about the importance of strong governance and ethics this week.
The Importance Of Ethics in Governance
I’ve worked for several startups and multinationals over the years, often in oversight and compliance roles. When there is a severe problem with management, I’ve often found that it is a result of insufficient oversight and a lack of one of the primary accounting government rules, separation of duties. But suppose you have an executive with absolute power, like in a sole proprietorship or a closely held corporation? In that case, you’ll get behavior that can put the entire company at risk.
Problems can range from misusing company assets to extreme abuses. At some point, the executive gets the impression that rules that apply to others don’t apply to them because of their unique situation. The result can be catastrophic for the company and the executive.
It also makes investing in the company far riskier than otherwise would be the case because the investor may think that Facebook, like most other corporations, has a set of controls that protects against executive misbehavior. It is pretty apparent now that it doesn’t.
Good governance and ethics protect the company and the individuals who run it because they help prevent mistakes that might result in criminal actions against those executives. With Zuckerberg’s kind of absolute power, liability may pass through Facebook to him, which should be far more troubling than it seems to be.
Ironically, Zuckerberg’s unique position represents an existential threat to Facebook. It shouldn’t exist because it muddies the related stockholder risk and leads to bad operational decisions. These decisions put the entire company at risk.
Also read: It is Time to Make Anger Management Training Mandatory
Maintaining Strong Governance and Ethics is Hard
A company needs a strong management structure with oversight so that there are protections against unacceptable behavior. It certainly isn’t uncommon for a company to act against its customers. We’ve seen bad behavior in Big Pharma, petro-chemical companies, entertainment companies, military contractors, and cigarette companies. All of these examples showcase the extreme problems that can result if governance and ethics aren’t taken seriously.
Over the years, I’ve watched companies that have been founded with strong controls tear down those controls over time, resulting in destructive behavior and dire outcomes. I was working at IBM when that happened there. Over the years, internal audit and quality control units were defunded and often disbanded until the customers revolted. IBM almost failed in the 1990s, and was built on a strong governance and ethics model. The oversight units were gutted or disbanded over time, and the resulting problems almost took out the most powerful technology company of its age.
The Zukerberg Problem
At Facebook, the problem seems to be Zuckerberg, who appears focused on disputing that the problems exist rather than correcting them. He appears to focus on eliminating the evidence of those problems, which never ends well. Facebook should serve as a reminder to all of us that proper and adequate governance, management controls, ethics, and oversight with teeth are critical to the company’s health. Regardless of that company’s size and power, if those elements are not in place or inadequate, the result will be an avoidable catastrophe.
Facebook’s unique ownership and control structure make adequate governance almost impossible, and ethical positions that should be static become harmfully fluid instead. If Facebook fails, I expect the cause will be traced to their ownership structure and lack of solid governance and corporate ethics.
